A Trump bull market will soon be derailed, as it has historically been an insurmountable headwind offender

From an investment perspective, Wall Street is a fan of Donald Trump in the White House. In President Trump’s first term in office, mature stock-driven Dow Jones Industrial Average (DJINDICES: ^DJI)Benchmark S&P 500 (SNPINDEX: ^GSPC)and fuel innovation Nasdaq Composite (NASDAQINDEX: ^IXIC) increased by 57%, 70%, and 142%, respectively.

In the year since his inauguration for his second, non-consecutive term and change, an encore Trump bull market rally has taken shape. From January 20, 2025, through the closing bell on February 10, 2026, the Dow, S&P 500, and Nasdaq Composite have risen 15%, 16%, and 18%, respectively. Outsized returns have become commonplace.

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While many catalysts are behind this exceptionally strong bull market, some of which can be attributed to Donald Trump, there are also headwinds that could derail this rally. Of particular concern is a remote barrier with more than 150 years of history in its sails.

To get a bit of home care, climbing Wall Street’s major indexes is nothing new. Since March 1897, there have been 33 presidential terms, 26 of which have produced positive returns in either the Dow Jones Industrial Average or the S&P 500. Most presidents oversee a growing U.S. economy and investment optimism, leading to stock market gains during their tenure — and Trump has been no exception.

However, President Trump’s early annual returns for his second term are the best of any president in more than a century. As an investor, it pays to understand what’s behind these outsized returns.

Not all upside catalysts in the stock market have been affected by the president. For example, the rise of artificial intelligence (AI) and the advent of quantum computing, which began under Joe Biden’s presidency, are playing a major role in boosting the broader market. Analysts at PwC believe AI could add $15.7 trillion to the global economy by 2030, while Boston Consulting Group estimates that quantum computing will create up to $850 billion in global economic value by 2040. These technologies have clearly excited investors.

Likewise, President Trump had no hand in the six times the Federal Reserve has cut interest rates since September 2024. Lowering lending rates can encourage corporate borrowing, resulting in increased capital devoted to hiring, acquisition activity, and innovation.

But the president’s policies have certainly played a role in facilitating upside for equities. For example, the major tax and spending law he signed in December 2017, the Tax Cuts and Jobs Act, permanently reduced the top marginal corporate income tax rate from 35% to 21%. This marked the lowest peak tax rate for businesses since 1939.

Although the low corporate income tax rate is intended to encourage hiring and innovation, the additional income retained by businesses has led to a historic number of share repurchases. According to the S&P Dow Jones Indices, a division of the more familiar S&P GlobalS&P 500 companies were projected to top a record $1 trillion in cumulative buybacks in 2025. Share buybacks can increase earnings per share for public companies with stable or growing net income, making them more attractive to value-focused investors.

While Trump’s tariff and trade policy has had controversial moments for the US economy and Wall Street since its unveiling in April 2025, it has also brought significant investment from select businesses in the US.

While this appears unlikely to stop a Trump bull market, a historically accurate valuation tool offers a different story.

Make no mistake about it: every bull market has headwinds to contend with. For example, historic levels of division within the Federal Open Market Committee threaten to turn America’s main financial institution, the Federal Reserve, into a stock market liability.

But there is, arguably, an even more telling historical headwind that could pull the rug out from under the Trump bull market — and it has to do with stock valuations.

Without question, value is subjective. Since there is no blueprint for valuing individual stocks or the broader market, what you think is expensive may be seen as a bargain by another investor. The subjective nature of equity valuations is one of the factors that make short-term directional movements in the Dow, S&P 500, and Nasdaq Composite unpredictable.

However, one time-tested valuation tool does an exceptional job of cutting through this subjectivity: the S&P 500’s Shiller Price-to-Earnings (P/E) ratio. You’ll sometimes see the Shiller P/E as a cyclically adjusted P/E ratio or CAPE ratio.

Instead of tracking trailing 12-month earnings, as traditional P/E ratios do, the Shiller P/E is based on average inflation-adjusted earnings over the previous 10 years. Accounting for a decade’s worth of earnings history instead of just 12 months ensures that recessions and other shock events (eg, the COVID-19 pandemic) do not significantly reduce readings.

Although economists introduced the Shiller P/E in the late 1980s, it has been back-tested to January 1871. Over the last 155 years, this rating averages a modest multiple of 17.34.

However, over the past three decades, it has spent most of its time above this long-term average. The Internet broke down the information barriers that existed between Wall Street and Main Street for more than a century, along with low interest rates, encouraging retail investors to seek out growth stocks and accept more risks with higher earnings multiples.

But as of the closing bell on February 10, the S&P 500’s CAPE ratio reached 40.36. It is the second-most expensive stock market in history, behind only the dot-com bubble, which reached a Shiller P/E of 44.19 in December 1999.

Since January 1871, the Shiller P/E has exceeded 30 only six times, including the present. After the previous five events, the Dow Jones Industrial Average, S&P 500, and/or Nasdaq Composite lost 20% to 89% of their value. While a repeat of the Dow’s 89% peak-to-trough decline experienced during the Great Depression is unlikely, history has made it abundantly clear that inflated valuations lead. the last (Keyword!) Significant declines in Wall Street’s major stock indexes.

While the CAPE ratio is not a timing tool, it has an impeccable track record of predicting the end of bull markets on Wall Street. If history were to repeat itself, the Trump bull market could soon come to an unceremonious end.

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Sean Williams has no positions in any of the stocks mentioned. The Motley Fool has positions on and recommends S&P Global. Motley Fool has a disclosure policy.

Prediction: The Trump bull market is quickly derailed, with this historically insurmountable headwind being the culprit. Originally published by The Motley Fool.